Power sector restructuring: Quo VadisIn Sri Lanka we are still playing games, not addressing real issues.

by Prof. Kumar David @ SO / 05MAR2006

A week after paying a bill, supply is disconnected for non-payment! Why? Because the computer system at the Head Office, or heaven knows where, does not talk to the computers in the regional offices. For reconnection, customers have to physically take payment receipts to the local area office for eyeball scrutiny, usually by a not very polite person. (These statements are based on some weeks of observation at the typical Dehiwala office last year). And all this is happening in one of Sri Lanka's premier engineering outfits in this the third decade of the IT revolution! This is an example and there are other deplorable practices at the local distribution level.

The accumulated debts of the Ceylon Electricity Board (CEB) stand at about Rs 80 billion and it is continuing to haemorrhage Rs 1.5 to 2.5 billion a month because it has been saddled by successive governments with exorbitant power purchase agreements with private suppliers of oil-fired electricity. In 2003 the average CEB tariff worked out at Rs 7.68 per kWh (unit), compared to January 2006 domestic tariffs between Rs 5.40 and Rs 7.73 in Kuala Lumpur, Jakarta, Taipei and Shanghai for more reliable supply. In Hong Kong a 99.99% reliable supply costs Rs 10.50, and Hong Kong does not have cheap hydropower! This is not a pretty picture; blame government and World Bank folly as much as corporate ineptitude.

The CEB is to be restructured in line with a concept paper agreed between the government, the trade unions including the influential engineer's union, and CEB management and later approved by Cabinet.

There will be six or seven separate entities (generation, transmission and system control, and four or five distributors). The CEB by name will continue as a body corporate and owner of all these entities, hence it will be a wholly but indirectly state owned structure.

Not much else has been spelt out but the public must demand a white paper for consultation before the future of critical public infrastructure is set in stone - public interest must take precedence over government preferences and trade union benefits.

Why should all of these activities be vested in state owned enterprises? Indeed the provision of critical 'public goods' must be entrusted to socially responsible entities answerable in the public domain; they are not suitable candidates for profit oriented private enterprises. But there are other activities that are not constrained in this way and still others with a mixed character.

These distinctions are being blurred by a narrow focus on the benefits of the aforementioned stakeholders and public interest is being set aside. Eventually, electricity will become more expensive, supply less reliable and sector organisations less efficient.

Hydroelectric projects in many countries are multi-purpose; irrigation for downstream farming in Sri Lanka, but also navigation and flood control elsewhere. Certainly such multi-purpose projects are improper candidates for privatisation.

The transmission grid is a natural monopoly in three ways; geographically, since only an insane community will allow duplication, the economies of scale are obvious, and thirdly, technically the grid needs a strict hierarchy of control. Hence grid ownership and control is pivotal to the public interest; universally, even after the most radical reforms transmission networks and control centres remain a regulated 'public good'.

The case for exclusive public ownership ends there - it does not extend to power generation or distribution. In 2003 (lamentably, the CEB web-site gives no more up to date statistics) about one-third of electricity generated in the country was from private or hired plants and about 60% was thermal - from costly oil. Most good hydroelectric sites have been exploited so the next step is to coal - that is certain.

This means that increasingly CEB power will be supplemented by private power generation, but this must happen in a competitive market. Unfortunately opportunities are limited since investment in private coal fired or natural gas fired power stations is unlikely for a variety of reasons, nevertheless the space must not be foreclosed in restructuring the industry.

There is nothing in the aforementioned agreement that prohibits private investment in power; but the future market structure has not been spelt out. No thought has been given to future commercial infrastructure since the obsession has been with preserving managerial sinecures, protecting jobs (not a bad thing if people are productive) and ideological posturing.

Ambiguity

Last year a $400 million agreement was signed with China for a 300MW coal-fired plant at Norocholai - further stages may follow. It is understood that India's National Thermal Power Corporation (NTPC), a state owned giant, plans to submit proposals for a 900MW (also in stages) coal fired plant. The total output of these stations in normal operation, technically called a load factor of 70 to 80%, will exceed the entire electricity production of the country at present.

Good, but the point is what commercial infrastructure will straddle this kind of intervention? Ambiguity is no way to start industry restructuring otherwise it will be an impediment to future growth. The NTPC project may be a competitive commercial venture, so what's the deal in respect of existing and future market players? The Chinese offer is a grant. Oil fired power, private or public, must be shut as soon as much cheaper coal fired capacity becomes available, but how will current long-term contracts with private plant owners be sorted out?

Finally, a few words about the most important and troubling part of the tripartite agreement; the major opportunity to do something positive during restructuring lies in the distribution sector - but total inflexibility has been written in since this sector is not to be divested.

Computer havoc

The CEB's electricity distribution service is in shambles; it has no concept of customer-service. Distribution is the public interface and even if other sections function well, if this falls apart, all else is futile. Distribution is what the public sees and what it gets. But inefficiency and mismanagement are rampant.

A week after paying a bill, supply is disconnected for non-payment! Why? Because the computer system at the Head Office, or heaven knows where, does not talk to the computers in the regional offices. For reconnection, customers have to physically take payment receipts to the local area office for eyeball scrutiny, usually by a not very polite person. (These statements are based on some weeks of observation at the typical Dehiwala office last year). And all this is happening in one of Sri Lanka's premier engineering outfits in this the third decade of the IT revolution! This is an example and there are other deplorable practices at the local distribution level.

The lesson is obvious; state enterprises are hopeless in matters that require good customer-relations and need to be sensitive and efficient in public responses in retail businesses. There is a strong case for privatisation, franchise arrangements or more independent public sector corporations (LECO, for example, has done a better job); all three models have to be used as appropriate. In India, Delhi has been divided into three sectors and novel franchising mechanisms put in place. States are being carved into two or three large regions, their distribution business separated out, and private, franchise, punchayat, local government or independent publicly held companies are taking over. India's 2003 Electricity Act is paving the way for imaginative reforms.

In Sri Lanka we are still playing games, not addressing real issues.

The author is one of only two Sri Lankan Fellows of the Institute of Electrical and Electronic Engineers - FIEEE - and his citation reads, "for contributions to the restructuring of the electricity supply industry and transmission access development". He was a Director of the CEB from 1970-74.